After a disaster, home loan borrowers do have options

The fires in Los Angeles County are ongoing with strong winds expected throughout Monday, Tuesday and into Wednesday. County officials say 24 people have died and early estimates of the economic costs have reached as high as $150 billion.

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The costs of any natural disaster, whether it’s a wildfire, a hurricane or a flood, are borne — at least in part — by homeowners themselves. Especially if their insurance premiums spike in the wake of the event.

Last week, the ratings agency Morningstar DBRS said the fire situation in LA “reinforces the need for adequate rate increases on home insurance in California.”

Any increase can be a challenge for mortgage holders and business borrowers. But after a disaster, those borrowers do have options.

Over the last year, Dominik Mjartan, CEO of American Pride Bank in Macon, Georgia, said many of his clients have faced steep spikes in their insurance premiums after major hurricanes in the Southeast.

In those cases?

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“The borrower simply may not have the ability to pay for those insurance premiums. Or, in some cases may not have easy access to insurance at all,” he said.

When borrowers have to pay way more for insurance, it’s in the bank’s interest to make sure that a borrower can still afford their monthly payments, Mjartan said.

“Because the last thing that a lender, particularly a community lender, wants to do is to have to take the property, or foreclose on the property,” he said. “That hurts everyone. It hurts the community, hurts the borrower, and it hurts the bank.”

Mjartan said the bank has a few tools it can use to help a borrower. For one, it can make changes to an existing mortgage to help offset the higher cost of insurance.

Jenise Hight, vice president of single-family credit risk policy at the government-backed mortgage corporation Fannie Mae, said lenders can modify loans to extend payoff periods or lower interest rates.

“It actually, you know, restructures the mortgage to take into consideration what the borrower’s payment situation is, to make the payment more affordable,” she said.

Borrowers can also take their time to just focus on recovering and figure out their payments later, said Nathan Rogge, CEO of First Pacific Bank in San Diego, California.

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When wildfires have affected his clients in the past, he said those borrowers typically deferred their payments.

“Normally it’s a, like a 90-day deferral, where you’ll just hold off on payments. Those will be tacked on to the back of the loan,” he said.

If a borrower’s insurance premiums rise too high, or if a borrower loses their insurance, their lender might force them to sell the property, said Mjartan at American Pride Bank.

“The lender just about doesn’t have a choice. The lender has to ask the borrower to pay the loan off,” he said.

That’s because the lender doesn’t want to be on the hook if an uninsured home floods or burns down.